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PAPER 

RE All BY 

WALTER D/RABNEY, 

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AT THE 

; SIXTH ANNUAL MEETING 

HELD AT 

VIRGINIA BEACH, YA,, 

July ioth, nth and 12th, 1894. 


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PAPER 

READ BY 

WALTER D. DABNEY. 


THE LEGAL EVOLUTION AND STATUS OF 
AMERICAN PAPER MONEY. 

An important question which has recently engaged, and 
must continue to engage public attention until a solution of 
it be arrived at, and which has a history and an aspect dis¬ 
tinctively legal, is that of our paper money. I have ven¬ 
tured, therefore, to prepare fpr your consideration, upon this 
occasion, some.qb^eryal^o^s on the legal evolution and status 
of American paper currency. 

Most of the colonies, from time to time before the Revo¬ 
lution, issued for use as a circulating medium their own ob¬ 
ligations, which, though varying somewhat in characteris¬ 
tics, were commonly known as “bills of credit.” The ex¬ 
perience with them was very disastrous. Subsequently 
came the Continental currency, issued by the old confedera¬ 
tion. This, notwithstanding the'laws of the States, clothing 
it with the quality of legal tender, “ gently fell asleep in the 
hands of its last possessors ” before the revolutionary strag¬ 
gle closed, leaving its very name a synonym of worthless¬ 
ness. 

From this time until several years after the new govern¬ 
ment went into operation under the Constitution, the United 



4 


THE LEGAL EVOLUTION. 


States were without a national currency, either of coin or 
paper. Very few of the States, between the recognition of 
independence and the adoption of the Constitution, ventured 
upon direct emissions of paper money ; and, although three 
or four banks were chartered with the privilege of issuing 
notes for circulation, practically the only currency of the 
country during that interval, and for several years after¬ 
wards, was foreign coin. 

The Constitution adopted in 1788 forbade the States to 
“emit bills of credit,” or to make anything except gold and 
silver a legal tender. It empowered Congress “to coin 
money and to regulate the value therof and of foreign coin.” 
But no authority to establish banks of issue, or to emit paper 
money or bills of credit, was expressly conferred on Con¬ 
gress. In fact, a proposition to authorize the emission of 
bills of credit by the Federal Legislature, was overwhelm¬ 
ingly defeated in the convention which framed the Consti¬ 
tution ; and one to give Congress the power to grant char¬ 
ters of incorportion was also rejected. 

And yet the first national currency put forth under the 
authority of the United States, before ever a coin had been 
struck or even a mint established, was through the agency 
of a national bank incorporated by Congress in 1791, 
largely with the view of increasing the volume of money in 
the country by means of the notes it was empowered to 
issue for circulation. 

Among the reasons urged by Hamilton in his famous re¬ 
port advocating the establishment of the bank were : That 
banks in good credit can circulate a far greater sum than 
the actual amount of their capital in gold and silver ; that 
whatever enhances the quantity of the circulating medium 
adds to the ease with which every industrious member may 
acquire that portion of it of which he stands in need ; that 
they tend to diminish usury. He even went so far as to say 
that “the vivification of industry by a full circulation with 


WALTER D. DABNEY. 


5 

the aid of a proper and well regulated paper credit, may 
• more than compensate for the loss of a part of the gold and 
silver of a nation, if the consequences of avoiding that loss 
should be a scanty or defective circulation.” He, however, 
explicitly excluded from among his arguments for a bank, 
the mere difficulty of getting money, because, as he says, 
that is a general complaint; “the complaint of all times, 
and one in which imagination must ever have too great 
scope to permit an appeal to it.” (See this report in An¬ 
nals of First Congress, 1789-91, Vol. II., p. 2280.) 

Hamilton preferred to augment the currency by means of 
bank notes rather than by the direct emission of paper 
money by the Government, observing that since this had 
been wisely prohibited by the Constitution to the individual 
States, the United States ought not to disregard the spirit 
of the prohibition. The capacity of the few State banks 
then existing was considered by him inadequate for the ac¬ 
complishment of the results which he contemplated, though 
he admitted their utility for purposes of local circulation, 
and never intimated a doubt of the right of the States to 
create them, or suggested the existence of any power in 
the Federal Government to suppress them. 

Through Hamilton’s influence largely, the bill to create 
the first bank of the United States passed both houses of 
Congress, but Washington, before approving it, took the 
written opinions of members of his Cabinet as to its con¬ 
stitutionality, which had been warmly controverted. The 
opinion of Mr. Jefferson, then Secretary of State, was that 
Congress had no power under the Constitution to create • 
the bank—one objection very characteristic of the views 
at that time held by Jefferson related to the feature of issuing 
notes for circulation. “ This,” he says, “according to my 
ideas of paper money, is clearly a demerit.” (See History 
of Bank of U. S., p. 91.) At a later period, however, he 
tacitly admitted the constitutionality of the bank, and so far 


6 


THE LEGAL EVOLUTION. 


waived his objections to paper money as to suggest an emis¬ 
sion of treasury notes as a currency. 

But the views of Hamilton, the Secretary of the Treasury, 
prevailed with the President. Hamilton’s argument was a 
powerful exposition of the implied powers of Congress 
under the Constitution, from the Federalist standpoint, and 
has furnished a foundation for many of the great landmarks 
of constitutional law which have since been established by 
the courts. (See History of Bank of U. S., p. 95.) Yet it 
is worthy of notice that he again failed to claim for the Fed¬ 
eral Government any exclusive power over the currency of 
the country. 

The Government held one-fifth of the stock of the first 
bank of the United States ; its notes were, by its charter, 
made receivable in payments of all public dues, and entered 
into circulation as the first national currency under the 
Constitution. But, notwithstanding all this, the power of 
Congress to authorize such currency was by no means uni¬ 
versally conceded. The original charter of the bank ex¬ 
pired in 1811, and a proposition to extend it met with violent 
opposition. The opposition came chiefly from some of the 
leading States where State banks had gained a foothold, 
and were anticipating a lucrative succession to the business 
of the national bank when it should cease to exist. 

In the debate in the Senate on the bill to renew the char¬ 
ter appears the first suggestion I have been able to find, 
after considerable investigation, that the Constitution con¬ 
fers on Congress exclusive control over the currency. It 
was put forward by Mr. Crawford, of Georgia, in answer 
to the argument that the National bank interfered with the 
privileges and prerogatives of the State banks. He inti¬ 
mated the opinion that bank notes are in effect bills of 
credit, and when issued by a State bank, in pursuance of 
State authority, are an evasion of the constitutional prohibi¬ 
tion against a State issuing such bills. Further, he inquired, 


WALTER D. DABNEY. 


7 


since the exclusive power of coining money and regulating 
its value is given to Congress, because the interest of the 
nation requires that the currency should be uniform both as 
to kind and as to value, does not the reason require that 
the same exclusive power should extend to all paper money 
which takes the place of coin in discharging the functions 
of a currency? (See Annals of Eleventh Congress, 1810- 
Ti, third session, pages 144 and 340.) 

Judge Story, in his commentaries on the Constitution 
(Vol. II., sec. 1120,) refers to a speech delivered by Web¬ 
ster in 1832, where the constitutionality of State bank notes 
is questioned, as if this were a view originated by the 
Massachusetts statesman. But, as is here shown, Crawford, 
more than twenty years before, advanced the same idea, 
and supported it by the very arguments which Webster 
afterwards used. 

These views, however, did not prevail at that time. Con¬ 
gress refused to renew the charter of the Bank of the 
United States, and consequently during the next few years 
State banks and State bank money multiplied with great 
rapidity. 

The second war with Great Britain coming on in>1812-’ 15, 
the financial resources of the United States were taxed to 
the utmost, and treasury notes were for the first time re¬ 
sorted to. Although Hamilton had suggested a doubt of 
the right of the National Government to issue bills of 
credit—and such the treasury notes undoubtedly were—no 
serious question of the constitutional power of Congress to 
issue them appears to have been raised, when measures for 
the purpose were actually before it. (See Annals of Con¬ 
gress during that period.) The issuance of the notes was 
conceded to be merely a form of borrowing money, though 
they were adapted to serve, to a considerable extent, the 
purposes of currency. They were generally made pay¬ 
able, with interest, at a fixed date, not to bearer, but to the 


8 


THE LEGAL EVOLUTION. 


order of a designated payee, and were transferable only by 
endorsement. They were*, in fact, as was held by the Su¬ 
preme Court of the United States in the case of United 
States v. Hardyman (13 Pet., 176,) ordinary “promissory 
notes” within the meaning of an act fixing a penalty for 
stealing such notes from the mail. This feature, of course, 
greatly limited their availability as a currency. 

But, while most of the issues were of this sort—that is, 
in the shape of ordinary negotiable notes—one put forth in 
1815 was so similar to the subsequent “greenback,” except 
in not possessing the legal tender quality, as to deserve 
special notice. Notes of this issue, of denominations less 
than $100, were made payable to bearer and transferable 
by mere delivery. They bore no interest, and no time was 
fixed for their payment, but they were convertible at any 
time, in sums not less than $100, into interest-bearing Gov¬ 
ernment bonds. Experience showed that the privilege of 
conversion was speedily availed of, and the small notes 
(there being no provision for re-issuing them) were thus 
soon withdrawn from circulation. (See Annals of Four¬ 
teenth Congress, first session, 1815-T6, p. 1624, Appx.) 

Once, during the war of 1812-15, it was proposed in the 
House of Representatives to make Government Treasury 
notes a legal tender in payment of private debts, but the 
House by a very large majority refused even to consider the 
proposition. (See Annals of Thirteenth Congress, 1814-T5, 
Vol. III., pp. 557-’8.) They were, however, generally made 
receivable for all public dues. 

During the second war with Great Britain, the incapacity 
of the State banks, as then organized and managed, to pro¬ 
vide the country with a uniform and stable currency, was 
clearly demonstrated. A letter from the Secretary of the 
Treasury to the Chairman of the Ways and Means Com¬ 
mittee of the House of Representatives in* October, 1814, 
contained this statement: “ The condition of the circula- 


WALTER D. DABNEY. 


9 


ting medium of the country presents another copious source 
ol mischief and embarrassment. The recent exportations 
of specie have considerably diminished the fund of gold 
and silver coin, and another considerable portion of that 
fund has been drawn by the timid and the wary from the 
use of the community into the private coffers of individuals. 
On the other hand, the multiplication of banks in the sev¬ 
eral States has so increased the quantity of paper currency 
that it would be difficult to calculate its amount, and still 
more difficult to ascertain its value with reference to the 
capital on which it has been issued. * * * It may in gen¬ 
eral be affirmed, therefore, that there exists at this time no 
adequate circulating medium common to the citizens of the 
United States.” The Secretary suggested more treasury 
notes as a temporary expedient, and recommended the re¬ 
establishment of the national bank as a permanent policy. 
(See Annals of Thirteenth Congress, 1814-’ 15, Vol. III., 

pp. 4 02-’3 ) 

The war of 1812-T5, besides demonstrating the inade¬ 
quacy of the State banks, gave an immense impetus to the 
growth of the idea of nationality, as applicable to the Gov¬ 
ernment of the United States ; and from this idea resulted 
new and very important views of the functions of the 
national government with respect to the currency. Mr. 
Dallas, the Secretary of the Treasury, in December, 1815, 
again urging upon Congress the establishment of a national 
bank, boldly and unequivocally took the ground that the 
Federal Government possessed the exclusive power of pro¬ 
viding and regulating the circulating medium of the coun¬ 
try. He deduced this opinion from the provisions of the 
Constitution empowering Congress to coin money and regu¬ 
late its value, and forbidding the States to coin money or 
emit bills of credit; and by reference also to the power 
which Congress had actually exercised of authorizing the 
issue for circulation both of bank notes and of notes direct 


10 


THE LEGAL EVOLUTION. 


from the treasury. “The constitutional and legal founda¬ 
tion of the monetary system of the United States,” he says, 
“is thus distinctly seen, and the power of the Federal Gov¬ 
ernment to institute and regulate it, whether the circulating 
medium consist of coin or of bills of credit, must, in its gen¬ 
eral policy, as well as in the terms of its investment, be 
deemed an exclusive power.” (See Am. St. Papers—Fin¬ 
ance—Vol. III., p. 18.) 

Mr. Calhoun heartily endorsed the opinions of Dallas. 
In a speech in the House of Representatives on the 16th of 
February, 1816, arguing for the establishment of the national 
bank, he maintained that the Constitution gave Congress 
the exclusive power to regulate the currency of the United 
States. In point of fact, he said, that power, though given 
to Congress, was not in their hands. The power was exer¬ 
cised by banking institutions—no longer responsible for the 
correctness with which they managed it. 'Gold and silver 
had disappeared entirely ; there was no money but paper 
money, and that was beyond the control of Congress. No 
one, he said, who studied the Constitution could doubt that 
the money of the United States was intended to be placed 
entirely under the control of Congress. The only object 
the framers of the Constitution could have in view in giving 
to Congress the power to coin money, regulate the value 
thereof and of foreign coin, must have been to give a 
steadiness and fixed value to the currency of the United 
States. He argued, therefore, taking into view the prohi¬ 
bition against the States issuing bills of credit, that there 
was a strong presumption this power was intended to be 
exclusively given to Congress. (See Annals Fourteenth 
Congress, First Session, 1815-T6, p. 1061.) 

Senator James Barbour, of Virginia, among others, 
adopted the same view, complaining that the power intended 
by the Constitution to have been lodged in the hands of the 
general government, was, by the failure of the government 


i 


WALTER D. DABNEY. 


11 


to make use of it, exercised by every State in the Union. 
(See Annals Fourteenth Congress, First Session, 1815-16, 
p. 242.) 

These arguments for the exclusive power of Congress 
over the currency were adduced to meet the assertion that 
a great National bank would practically destroy the State 
banks and drive their notes out of circulation. This pre¬ 
diction was not fulfilled, but the friends of the National 
bank not only admitted that this would probably be the 
case, but unhesitatingly proclaimed the suppression, or 
at least the regulation, of State bank issues to be one of the 
principal objects had in view by them. The second Bank 
of the United States was accordingly established, with a 
capital of $35,000,000, of which $7,000,000 was subscribed 
by the government, and its notes, like those of the first 
bank, were made receivable in all payments to the United 
States. The directors were authorized to establish branch 
banks in any of the States or Territories in their discretion ; 
but no direct check upon the use of State bank money was 
at that time undertaken by Congress ; nor was there any 
express provision protecting the National bank from hostile 
State legislation under the guise of taxation or otherwise. 

The feeling against the National bank was very bitter in 
some of the States, and manifested itself in legislative 
enactments plainly designed to exclude its operations 
entirely from their, borders. Early in the year 1818, the 
Legislature of Maryland passed “ an act to impose a tax on 
all banks or branches thereof in the State of Marylaud 
not chartered by the Legislature” of that State. This was 
undoubtedly aimed at the branch of the United States bank 
which had been established the year before at Baltimore. 
It forbade the issuance of notes by any bank or branch 
thereof located in Maryland without authority from the 
State, except upon stamped paper to be furnished by the 
State and paid for on delivery. The question of the con- 


12 


THE LEGAL EVOLUTION. 


stitutionality of this legislation, so far as it affected the bank 
of the United States, was brought before the Supreme Court 
of the United States, and decided in 1819. (McCulloch v. 

Maryland, 4 Wheat. 316.) It involved, of course, the 
power of the United States to create a bank, and the 
reasons brought forward by Hamilton in the Cabinet of 
Washington were urged upon the court in support of this 
power. The opinion, which was unanimous, was delivered 
by Chief Justice Marhall, and had ever been considered 
one of the greatest judgments of that great jurist. The 
public estimate of the importance of the questions in¬ 
volved was indicated b} r his opening remarks, as follows: 
“ The Constitution of our country in its most interesting and 
vital parts is to be considered ; the conflicting powers of 
the Government of the Union and of its members, as 
marked in that Constitution, are to be discussed, and an 
opinion given which may essentially influence the great 
operations of the government. No tribunal can approach 
such a question without a deep sense of its importance and 
of the awful responsibility involved in its decision, but it 
must be decided peacefully or remain a source of hostile 
legislation, perhaps of hostility of a still more serious 
nature.” 

It must be confessed that the argument of the court on 
this branch of the case was little more than a restatement 
of the views of Hamilton. The general question of the 
constitutionality of the bank had been so thoroughly dis¬ 
cussed during the previous quarter of a century, that it was 
impossible to advance anything original upon the subject. 
But Marshall had a wonderful faculty of absorbing, assimi¬ 
lating, and presenting anew with a force and vigor peculiarly 
his own, the Hamiltonian theory of the Constitution, and he 
demonstrated, in the most irrefutable manner, the power of 
Congress to create a bank. 

The power to provide a paper currency of bank notes 


WALTER D. DABNEY. 


13 


was incidental to the creation of a bank ; but in the same 
case another question was raised, upon the decision of 
which the value of this power essentially depended. This 
was the right of a State by its taxing power to exclude the 
national bank currency from its limits, as Maryland had 
attempted to do. Should this right really exist, the power 
of the United States to provide a national currency would 
be only a barren theory : and so far from Congress having 
the exclusive control over the currency which had been 
claimed for it, it could only exercise the futile function of 
coining metallic money, which the paper issues of State 
banks would be sure to expel speedily from circulation. 
The power of the State to tax the National bank .issues was, 
indeed, considered the great and vital question in the case, 
and upon this the arguments were chiefly spent. Before 
the highest tribunal of the country, presided over by the 
most illustrious of American judges, were assembled, for 
the discussion of this momentous question, several men 
whose fame as lawyers and as statesmen is part of our his¬ 
tory. Webster, whose splendid powers, already recognized 
by his countrymen, were destined to achieve yet greater 
triumphs, was there. Wirt, the Attorney-General, whose 
famous speech on the trial of Aaron Burr had years before 
placed him in the front rank of forensic orators, was on the 
same side, and associated with them for the bank was Wil¬ 
liam Pinckney, whose profound knowledge of public law, 
international as well as constitutional, was probably sur¬ 
passed by that of no other member of the American bar. 
Opposed to these were Luther Martin, Attorney-General of 
Maryland, “the Federal Bulldog” whom Jefferson hated, 
but whose argument on this occasion was probably official, 
and notin accordance with his real convictions; Francis 
Hopkinson, of great repute as a lawyer in his day, but 
better known as the author of the patriotic ode “ Hail 
Columbia ” ; and General Walter Jones, who, in ability and 


14 


THE LEGAL EVOLUTION. 


reputation, was scarcely the inferior of his associates. The 
Chief Justice paid but a just tribute to the counsel when he 
said that both the affirmative and negative of the question 
had been maintained “ with a splendor of eloquence and 
strength of argument seldom, if ever, surpassed.” 

In behalf of the State’s right to impose the tax, it was 
argued that the unlimited power of taxation results from 
State sovereignty, and can only be abridged by the express 
terms of the Constitution ; and that the only prohibition 
against the taxing power of the States found in that instru¬ 
ment, is in the clause forbidding the States to tax imports or 
exports without the consent of Congress. But the Chief 
Justice, under whose searching intellect all propositions 
seemed to resolve themselves into their constituent ele¬ 
ments, said that although there is no express provision for 
the exemption of this currency from State taxation, “ yet 
the claim to such exemption has been sustained upon a prin¬ 
ciple which so entirely pervades the Constitution, is so in¬ 
termixed with the materials which compose it, so interwo¬ 
ven with its web, so blended with its texture, as to be inca¬ 
pable of being separated from it without rending it into 
shreds. This great principle is that the Constitution and 
the laws made in pursuance thereof are supreme ; that they 
control the Constitution and laws of the several States, and 
cannot be controlled hy them.” “The sovereignty of a 
State,” he said, “ extends to everything which exists by its 
own authority or is introduced by its permission, but it does 
not extend to those means which are employed by Congress 
to carry into execution powers conferred on that body by 
the people of the United States.” 

It was also argued, in behalf of the State’s right to tax the 
notes of the Bank of the United States, that Congress had 
exercised the same right of taxation over the notes of State 
banks. But said the Court: “The two cases are not on the 
same reason. The people of all the States have created 


WALTER D. DABNEY. 


15 


the general government, and have conferred on it the gene¬ 
ral power of taxation. The people of all the States and 
the States themselves are represented in Congress, and, by 
their representatives, exercise this power. When they tax 
the chartered institutions of the States, they tax their con¬ 
stituents, and these taxes must be uniform. But when a 
State taxes the operations of the United States, it acts upon 
institutions created not by their own constituents, but by 
people over whom they claim no control. It acts upon the 
measures of a government created by others as well as 
themselves for the benefit of others in common with them¬ 
selves. The difference is that which exists, and always must 
exist, between the action of the whole on a part, and the 
action of a part on the whole, between the laws of a gov¬ 
ernment declared to be supreme, and those of a government 
which, when in opposition to those laws, is not supreme.” 
The State tax on National bank notes was accordingly held 
to be void, as repugnant to the Federal Constitution. 

Notwithstanding this decision and the apparently con¬ 
clusive reasoning on which it was based, the right of the 
States to tax the operations of the Bank of the United States 
within their limits was strenuously maintained in some 
quarters, and the interference of the Federal courts for the 
protection of the bank was bitterly resented. 

About the time of the decision of the case of McCulloch 
v. Maryland , the Legislature of Ohio passed an act im¬ 
posing on each branch of the bank in that State a tax of 
$50,000 per annum, and empowering the Auditor of the 
State to collect it—using force if necessary. The Circuit 
Court of the United States, on the application of the bank, 
granted an injunction against the contemplated raid of the 
State authorities upon its vaults. The writ was served on 
Osborne, the auditor, but he had either been too quick for 
the court, or else he openly defied its mandate ; his agent 
broke into the branch bank at Chillicothe and took there- 


16 


THE LEGAL EVOLUTION. 


from about $20,000 in specie, and the remainder of $100,000 
in notes—the whole amount representing the State tax on 
the two branches of the United States Bank in Ohio. A 
new writ was then served on Osborne and his agent, en¬ 
joining them from disposing of the funds and notes of the 
bank as directed by the State law. The Circuit Court of 
the United States decided in favor of the bank, and the 
case came before the Supreme Court in 1824. ( Osborne v. 

Bank of United States , 9 Wheaton, 738.) 

The Court was asked to reconsider so much of its opinion 
in the case of McCulloch v. Maryland as decides that the 
States have no rightful power to tax the Bank of the United 
States; but the constitutional principles which had been 
laid down in that case were re-affirmed, the Chief Justice 
and Mr. Justice Johnson both delivering opinions. The 
latter, while agreeing as to those principles with the 
other members of the court, dissented from the decision in 
this case, because he thought the jurisdiction exercised by 
the United States Court in hearing it was unconstitutional. 
He gave the first judicial exposition (if language used in a 
dissenting opinion can be called such) of the principle of 
exclusive national control over the currency, which had 
been invoked for the establishment of a National bank, and 
which had aroused against that institution the bitter and 
combined opposition of the State banks. 

“The expiration of the charter of the former bank,” he 
said, “ led to State creations of banks ; each new bank in¬ 
creased the facilities of creating others ; and the necessities 
of the general government, both to make use of the State 
banks for their deposits, and to borrow largely of all who 
would lend to them, produced that rage for multiplying 
banks, which, aided by the emoluments derived to the 
States in their creation, and the many individual incentives 
which they developed, soon inundated the country with a 
new description of bills of credit against which it was obvious 


WALTER D. DABNEY. 


17 


that the provisions of the Constitution opposed no adequate 
inhibition. * * * * A specie-paying bank, with an 

overwhelming capital, and the whole aid of the Government 
deposits, presented the only resource to which the Govern¬ 
ment could resort to restore that power over the currency of 
the country, which the framers of the Constitution evi¬ 
dently intended to give Congress alone.” 

The right of Congress to add to the circulating medium 
of the country through the agency of banks of issue, and the 
incapacity of the State governments to interfere with that 
right by taxation of the notes of the bank, have ever since 
this decision been acquiesced in. It may be added that the 
notes of the United States Government itself, being issued 
in pursuance of the power to borrow money, are, under the 
principles enunciated by Chief Justice Marshall in Weston 
v. Charleston (2 Peters, 449), exempt from taxation by the 
States. For such a tax would be virtually a tax upon the 
power of the National Government to borrow money, and 
might be so extended, if permitted at all, as to defeat that 
power. 

The meaning and practical effect of the constitutional 
provision forbidding the States to “ emit bills of credit” 
was for the first time presented for the consideration of the 
Supreme Court of the United States in 1830, in the case of 
Craig v. Missouri (4 Peters, p. 410). In 1821 the Legis¬ 
lature of that State passed an act for the establishment of 
loan offices, at which loans should be made by the State, to 
its citizens, of certain certificates which the act directed to be 
issued of denominations not exceeding ten dollars nor less 
than fifty cents. 

The certificates were made receivable for taxes and other 
moneys due the State or any county or town therein ; and 
for salaries and fees due State officers. Certain public prop¬ 
erty, as well as the credit of the State, was specifically 
pledged for their redemption, and the treasury officials were 


18 


THE LEGAL EVOLUTION. 


required “ to withdraw annually from circulation ” one-tenth 
part of them. They were plainly intended to circulate 
as a currency. The counsel who appeared for Craig, 
denying the right of the State to issue these certificates, 
was Daniel Sheffey, the founder of the well-known Virginia 
family of that name, an able lawyer, and an ardent Fed¬ 
eralist. In respect to the reason for prohibiting the States 
from emitting bills of credit, Mr. Sheffey argued that in re¬ 
lation to money as a circulating medium, the States are 
one ; that each and all of them have one and the same in¬ 
terest in a sound currency ; that these interests are a unit 
not only from the neighborhood of the States to each other, 
and their free and unrestricted intercourse, but because the 
regulations of the Constitution embrace the whole subject 
of money as a circulating medium. Following up his argu¬ 
ment he admitted that the principles he contended for would 
bring into serious doubt the legality of the issue of bank 
notes under State charters. 

The purport of Mr. Benton’s argument in behalf of the 
State of Missouri was that the quality of legal tender was 
essential to a bill of credit in the constitutional sense, and 
that quality, being absent from these certificates, they were 
not prohibited. The eminent senator from Missouri did not 
confine himself strictly to argument, however, and it is 
somewhat amusing at the present day to read his remarks 
concerning the impropriety of the language of the writ 
“summoning the Sovereign State of Missouri” before the 
court. He said he appeared rather as a “ corps of obser¬ 
vation ” to watch what was going on than as an advocate 
to vindicate the acts of his State. He had listened to what 
had been going on before the court, and found a gentleman 
from another State imputing to Missouri an act fraught with 
injustice and immorality. “ If in questions of this kind,” 
he exclaimed, “ the character of a sovereign State shall be 
made the subject of such imputations, this peaceful tribunal 


WALTER D. DABNEY. 


19 


would not be able to procure the submission of the States to 
its jurisdiction ; and contests about civil rights" would be 
settled amid the din of arms rather than in these halls of 
national justice.” 

Three justices of the court of seven were of opinion that 
the issue of the certificates should be sustained on one or 
other of the following grounds: i. That it was at least 
doubtful whether it was not a bona fide means of borrowing 
money, in which event it would, of course, be permissible ; 
2. Because to constitute an instrument a bill of credit in the 
constitutional sense, there must be, if not a legal tender 
quality attached, at least some obligation or necessity to re¬ 
ceive them in payment, and some legislative compulsion to 
give them circulation ; 3. Because the form of the instru¬ 
ment, being an interest-bearing promise to receive, distin¬ 
guished it from a bill of credit, which was a promise to 
fay; 4. Because the certificates were issued on the faith of 
a fund providing for their redemption and not merely on the 
faith of the State, whereas bills of credit have no such re¬ 
demption fund to meet their payment. The majority of 
the court, however, decided—Chief Justice Marshall deliver¬ 
ing the opinion—that the certificates were bills of credit, 
and consequently prohibited. Said he: “ To emit bills of 
credit conveys to the mind the idea of issuing paper in¬ 
tended to circulate through the community for its ordinary 
purposes as money, which paper is redeemable at a future 
day. This is the sense in which the terms have been al¬ 
ways understood.” “ The term has acquired an appropriate 
meaning, and bills of credit signify a paper medium in¬ 
tended to circulate between individuals, and between Govern¬ 
ment and individuals, for the ordinary purposes of society. 
If the prohibition (to emit bills of credit) means any¬ 
thing, if the words are not empty sounds, it must compre¬ 
hend the emission of any paper medium by a State gov¬ 
ernment for the purposes of common circulation.” Al- 


20 


THE LEGAL EVOLUTION. 


though the attempt to put forth a paper currency emanating 
directly from the State government was thus frustrated, the 
object was accomplished by the interposition of a nominal 
corporation, acting in its own name, but for the account and 
benefit of the State. 

In imitation of the plan of the first Bank of the United 
States, a number of States, soon after its charter expired, 
established banks of which considerable proportions of the 
stock were subscribed and owned by the State. Others, ad¬ 
vancing a step further along the line of public ownership, 
went into the business of banking on their own accounts 
exclusively—making it a branch of public administration. 
In the latter class of banks the stock was all subscribed and 
owned by the State, no private shareholders were admitted, 
and the corporation consisted only of the president and di¬ 
rectors, who were appointed and acted as public officers. 

In a suit against the Planters’ Bank of Georgia—the 
State being one of the stockholders—the defence was set 
up that the suit was against the State, but the Supreme 
Court of the United States held otherwise. Subsequently, 
the Supreme Court decided that the Commonwealth Bank 
of Kentucky, which was owned and administered ex¬ 
clusively by the State—there being no private stockholders— 
was yet a different person from the State, and hence was 
liable to suit where the State would not have been liable. 
(See Bank of Commonwealth v. Wistar , 2 Pet. 318.) 

This distinction between the State itself and a bank 
owned and conducted exclusively by it, was some years 
afterwards applied to sustain the note issues of this very 
bank, and to differentiate them from bills of credit emitted 
by the State. (See Briscoe v. Commonwealth Bank of 
Kentucky , 11 Peters, 257). 

The case in which the question was presented first came 
before the court a short time before the death of Chief 
Justice Marshall, which occurred in 1835 5 but no decision 


WALTER D. DABNEY. 


.21 


was announced, because a majority of the whole court did 
not concur in opinion regarding it. Justice Story is au¬ 
thority for the statement than on the first argument a ma¬ 
jority of the members present were of opinion that the 
notes of the bank were bills of credit emitted by the State, 
within the meaning and prohibition of the Constitution. 
Two members of this majority were Judge Story himself 
and Chief Justice Marshall. 

Before the case was again argued, great changes had 
taken place in the membership of the court, the most im¬ 
portant of which, and the most far-reaching in its effect 
upon the judicial interpretation of the Constitution from 
that time to the beginning of the civil war, was the death 
of Marshall and the appointment of Taney as Chief Justice 
in his place. Only a few years before this time Taney had 
been placed by President Jackson at the heard of the Treas¬ 
ury Department, for the very purpose of carrying out his 
policy of removing the Government deposits from the Bank 
of the United States. The independent treasury system 
not having at that time been adopted, it wa*s necessary to 
have recourse to the facilities of the State banks for the 
fiscal purposes of the Government, and some of the deposi¬ 
tories selected by Secretary Taney for the public moneys 
were banks of issue owned and operated exclusively by the 
States, e. g., the Bank of the State of Alabama. (See Docs, 
with Report of Secretary of Treasury, December 4th, 1833.) 
He, therefore, came upon the bench committed, to a certain 
extent, to the constitutionality of this species of banks. It is 
not meant that Judge Taney was influenced in his judicial 
opinion by partisan considerations, or by the desire to avoid 
a seeming inconsistency. The ermine was never worn by 
one of greater purity or firmness of character. He and 
the majority of his associates on the Supreme Bench only 
shared the general sentiment of reaction, which had some 
time before set in against the constitutional views of Mar- 


22 


THE LEGAL EVOLUTION. 


shall. There were several important constitutional cases- 
besides this of the Kentucky bank which had been argued, 
but not decided, before Taney’s appointment, in which he 
and the new court (as it may well be called) came to con¬ 
clusions different from those which Marshall was known to- 
have entertained. 

Not only were the notes in this case issued by a bank 
entirely owned and controlled by the State, in which no pri¬ 
vate individual owned a dollar of stock, but, by an act passed 
shortly after the establishment of the bank, creditors were 
compelled to receive its notes"in payment, or else to suffer 
a considerable postponement of their rights. This, besides- 
impairing the obligation of contracts,would seem to have been 
an evasion, if not a direct and absolute violation, of that clause 
of the Constitution which prohibits the States from making 
anything but gold and silver a tender in payment of debts. 
This modified legal tender quality of the notes was not, 
however, considered by the court, or, at least, its constitu¬ 
tionality was not passed on. The arguments and the opin¬ 
ions turned upon the questions—first, whether the notes 
were “bills of credit,” as meant by the Constitution; and, 
second, whether their issuance by a bank owned and con¬ 
trolled wholly by the State, through agents appointed by 
the Legislature, was not in fact an emission by the State. 

The opinion of the court was delivered by Justice 
McLean, who was one of the dissentients in the case of 
Craig v. Afissotiri, but who undertook to differentiate the 
character of the State certificates involved in that case from 
the bank notes involved in this. The line of reasoning was- 
somewhat as follows: That the State could undoubtedly 
incorporate private individuals into a bank with authority 
to issue notes for circulation ; that the fact of the State own¬ 
ing all the capital of the bank, and of its operations being 
conducted for the sole benefit of the State, did not make it 
a mere agency of the Government, nor identify it with the 


WALTER D. DABNEY. 


23 


State, nor confer upon it any of the attributes of sovereignty ; 
that it was a different personality from the State, and its 
issues were not the issues of the State, either in form or 
in fact. It was also held that the bank notes were not 
“bills of credit ” in the constitutional sense, because there 
was a fund appropriated by law for their redemption— 
namely, the capital of the bank, and also the holders had 
the right of suit against the bank to enforce their payment. 
The right of suit, it was said, never attached to the “ bills of 
credit” prohibited by the Constitution, because they were 
the emission of the sovereign States as they existed before 
the Constitution, which could not be sued. 

The opinion of the court, of course, sustained the issue 
of the notes as constitutional, but two of the judges denied 
that any distinction could be maintained between notes 
issued by a bank of a purely public character and notes 
issued by the State itself. The distinction is certainly diffi¬ 
cult to grasp ; and the refinements by which the court dis¬ 
tinguished these notes from “bills of credit ” were also in 
direct opposition to the comprehensive definition which 
Marshall had given of those instruments in his opinion in 
Craig v. Missouri. Nothwithstanding Briscoe's Case was 
followed by several others which arose prior to the Civil 
War, it may be doubted whether this kind of currency 
would to-day be countenanced in the Supreme Court, even 
should the tax on State bank issues be repealed. 

Justice Story, dissenting in this case, while maintaining 
that the issues of the bank under consideration were in 
substance and in fact issues of the State, and therefore 
void, was careful to remark that his objections did not 
apply to the notes of private State banks. But he said the 
right of the State to create banks of issue is “ subject al¬ 
ways to the control of Congress, whose powers extend to 
the entire regulation of the currency of the country.” 
This quotation is given because it was assumed as an un- 


24 


THE LEGAL EVOLUTION. 


questionable proposition by a majority of the Federal 
Supreme Court in the subsequent case where the tax on 
State bank issues was sustained. The validity of the issues 
of banks incorporated, but not exclusively owned by the 
State, though sometimes questioned in argument, both in 
Congress and at the bar of the Supreme Court, seems 
never to have been directly assailed in judicial proceedings, 
but has been recognized and tacitly admitted time and time 
again. 

One consideration I have not seen adverted to, seems to 
me to completely differentiate the notes of private State 
banks from bills of credit emitted by the State. This is, 
that the right to issue circulating notes is not a franchise 
(like that of taking tolls, for example,) exercisable only by 
legislative permission. If such it were, it might with force 
be argued that the State, being forbidden to do the thing 
directly, could not authorize its citizens to do it. But, 
unless restrained by statute, any one may issue notes to be 
used as currency. (See Daniel Neg, lusts., Fourth Ed., 
Vol. II., sec. 1668.) Therefore, when a State incorporates 
private individuals into a banking company, with power to 
issue circulating notes, it does not confer on them a sov- 
' ereign attribute any more than would be conferred by au¬ 
thorizing the company to borrow money or to do any other 
thing an individual might do. This consideration also 
shows the fallacy of the argument that congressional legis¬ 
lation against State bank issues is an interference with the 
reserved sovereignty and prerogatives of the States. 

The notes of these public State banks were usually, by 
the acts authorizing their issue, made receivable for public 
dues. In some cases the State afterwards undertook to 
withdraw this privilege, giving rise to litigation in the 
Federal courts of the character which so long embarrassed 
Virginia with her tax-receivable coupons. Ah example of 
it may be seen in the case of Woodruff v. Trafnall , 10 


WALTER D. DABNEY. 


25 


How. 190, where it was held that the notes of the bank* in 
circulation at the time of the repeal of the provision making 
them receivable for public dues, were not affected by the 
repeal, and the holder might use them to discharge his in¬ 
debtedness to the State, notwithstanding he acquired them 
after the repealing act was passed. 

The charter of the second Bank of the United States 
having expired in 1836, and its notes having been with¬ 
drawn Irom circulation, an issue of treasury notes was au¬ 
thorized the following year, for the first time since 1815— 
no such notes having been issued during the twenty years 
of the bank’s existence. This fact is a striking illustration 
of the service the bank had rendered the Government by 
enabling it, through temporary loans, to tide over emergen¬ 
cies. It may be observed here that the first and second 
Banks of the United States were chiefly useful as fiscal 
agents of the Government; their note issues were never 
sufficiently great to provide the country with an adequate 
amount of currency; and while they may have operated to 
some extent to restrain the issues of State banks, and to 
compel them to maintain specie payments, the existence of 
State banks of issue, until Congress provided a general 
banking system, with a special view to creating a currency, 
was absolutely necessary. 

Treasury note issues were frequent from the time the 
Bank .of the United States went out of existence to the 
breaking out of the war, but not in sufficient amounts to 
form a very considerable proportion of the currency, and 
always as a temporary expedient—their speedy redemption 
and retirement being kept constantly in view. The only 
other national currency at that time was coin. The circu¬ 
lating medium of the country consisted chiefly of the notes 
of State banks, upon which there was no national restric¬ 
tion, which possessed various degrees of credit and very 
unequal resources, and which were administered often with 


26 


THE LEGAL EVOLUTION. 


great and not unfrequently with little skill, prudence and 
integrity. 

The banks were always under the theoretical obligation 
to pay their notes on demand in specie, but there were 
periods when specie payments were suspended by most of 
them—sometimes for several years together. Yet their 
notes, in the absence of any other currency, continued to 
circulate, at a discount greater or less according to circum¬ 
stances. There existed between the banks and the com¬ 
munities in which they were located the reciprocal relation 
of debtor and creditor; and so long as the good assets of 
the banks, consisting of commercial paper maturing at short 
periods, equalled or exceeded their liabilities, the public 
confidence in the ultimate redemption of the notes kept 
them in circulation. Although in the absence of a pro¬ 
hibitory statute, the right to issue notes for circulation could 
be exercised by any one who pleased, yet the privilege was 
in fact so generally restricted by legislation that the policy 
of the States may be said to have been to confine it to in¬ 
corporated institutions, or to persons acting under a general 
banking law. For example, when a city, under a clause in 
its charter allowing it to borrow money, undertook to issue 
its obligations to circulate as currency, the issue was held 
to be void, because against the policy of the State. (See 
Thompson v. Richmond , 12 Wall, 349.) 

On the 31st December, 1861, the State banks suspended 
specie payments, and in consequence of that suspension, 
and of the necessity of adequate provision for the financial 
exigencies of the Government during the war, a new finan¬ 
cial policy was adopted. The theory of nationality and 
centralization of power in the General Government then 
reached its climax. By a series of acts, commencing with 
that of February 25, 1862, Congress authorized the issue of 
United States notes to the amount of several hundred mil¬ 
lions of dollars, and the notes so issued, except those for frac- 


WALTER D. DABNEY. 


27 


tional parts of a dollar, were declared to be “ lawful money 
and a legal tender” in payment of all debts, public and pri¬ 
vate, in the United States except duties on imports and in¬ 
terest on the public debt. This was the first time since the 
adoption of the Constitution that this quality had been 
attached to paper money by the United States. The notes 
were made convertible into Government bonds, and receiv¬ 
able at par in payment for loans, but instead of being can¬ 
celled when received in payment by the Government, the 
Secretary of the Treasury was authorized to reissue them, 
thus making them a permanent element in the currency. 
They were made payable to bearer, but not on demand, or 
at any specified time ; in fact, no definite period for their 
payment in coin was fixed or even contemplated at the time 
they were issued. 

In the case of Bank v. Supervisors , 7 Wall, 26, decided 
in 1868, an interesting question was presented as to the 
character of these notes—whether they were fiat money , or 
obligations of the Government redeemable in coin. It was 
argued that they were not securities issued under the con¬ 
stitutional power to borrow money on the credit of the 
United States ; that not being payable either on demand or 
at any fixed time, they might be paid when presented by 
new notes of a similar kind ; that they were mere promises 
to make other promises, to be renewed ad infinitum; that 
there was no relation of debtor and creditor created by 
them, no loan or evidence of loan; that the credit of the 
Government was no further involved than it would be in 
fixing the Government stamp and giving a nominal value 
to debased coin greater than its real value ; that Congress, 
in short, instead of borrowing money, made it, and rendered 
borrowing unnecessary. Thus was the fiat money view of 
the greenback presented ; and Chief Justice Chase, deliver¬ 
ing the opinion of the court, admitted there was much 
force in it. “ It is clear,” he said, “ that these notes were 


28 


THE LEGAL EVOLUTION. 


intended to circulate as money, and with the National bank 
notes to constitute the credit currency of the country.” * * 
“ But, on the other hand,” he said—and this was the con¬ 
clusion reached—“ it is equally clear that these notes are 
obligations of the United States. Their name imports obli¬ 
gation. Every one of them expresses upon its face an en¬ 
gagement of the nation to pay the bearer a certain sum. 
The dollar note is an engagement to pay a dollar, and the 
dollar intended is the coined dollar of the United States.” 

In July, 1862, Congress for the first time undertook to 
restrict paper issues not emitted under its own authority. 
This it did by prohibiting, under penalty of fine or imprison¬ 
ment, the issuance for circulation, as money, of notes or 
other tokens for less than one dollar. The object of this 
provision was to secure the field for the circulation of postage 
stamps to which a limited quality of currency was given by 
the same act, and which, a short time after, were superseded 
for purposes of change by fractional notes. The provision 
was held not to apply to notes issued by a manufacturing 
company promising to pay not in money but in goods, and 
having a limited neighborhood circulation as a currency. 
( United States v. Van Auken , 96 U. S., 366.) 

In February, 1863, the first National banking act was 
passed entitled “ An act to provide a national currency se¬ 
cured by a pledge of United States stocks, and to provide 
for the circulation and redemption thereof.” The notes of 
the National banks are issued to them by the Government, 
and secured by a deposit of United States bonds in the 
national treasury. Should a bank fail, the Government re¬ 
deems its notes, selling the bonds for the purpose, and having 
moreover a first lien on the assets of the bank in case 
of deficiency. By this means National bank notes are made 
absolutely secure. The failure of the bank does not in the 
least affect their value. But as the profit of issuing them 
depends largely on the cost of the bonds by which they 


WALTER D. DABNEY. 


29 


must be secured, the amount of them in circulation decreases 
as the price of the bonds advances ; and unless some other 
security be substituted for Government bonds, the National 
bank circulation must cease to exist with the national debt. 

By an act of July, 1866, a tax of 10 per cent, was im¬ 
posed by Congress “ on the amount of notes of any person, 
State bank or State banking association used for circula¬ 
tion,” and paid out after August 1st, 1866. State bank 
money was difficult to suppress, but this was too much for 
it; it went out of existence, and is still kept out of circula¬ 
tion by this provision. The constitutionality of this tax was 
brought in question before the Supreme Court in 1869, in 
the case of Viazie Bank v. Fenno , 8 Wall, 533. One of 
the arguments against the tax was that it impaired a fran¬ 
chise granted by the State (namely, that of issuing notes as 
a currency) which it was said, Congress could not constitu¬ 
tionally do. Two of the Justices concurred in this view, 
being of opinion that the tax was one upon powers and 
faculties belonging to the State governments. And it may 
be acknowledged that if the issuance of paper money for 
circulation was a power and faculty belonging to the State 
governments, to be exercised as an agency of their sov¬ 
ereignty, the tax would beyond all doubt be unconstitutional. 
This principle was laid down in the case of Collector v. 
Day, 11 Wall, 113, where it was held by the Supreme Court 
that the United States could not tax the agencies established 
by the State governments for the discharge of their consti¬ 
tutional functions, and that a tax on the salary of a State 
judge was therefore void. But the issuance of paper money, 
so far from being a proper sovereign function of the State, 
is expressly forbidden to the States by that clause of the 
Constitution which says: “No State shall emit bills of 
credit.” 

The tax on State bank issues was sustained by the ma¬ 
jority of the court, not only on the ground that the power 


eo 


THE LEGAL EVOLUTION. 


of Congress “ to lay and collect taxes ” was without limita¬ 
tion, but on the broader ground that Congress has, and at 
its pleasure may, exercise exclusive control over the cur¬ 
rency of the country. Chief Justice Chase, delivering the 
opinion, after explaining the measures taken by Congress 
to furnish the country with a national currency, said*: 
“ Having thus, in the exercise of undisputed constitutional 
powers, undertaken to provide a currency for the whole 
country, it cannot be questioned that Congress may, con¬ 
stitutionally, secure the benefit of it to the people by appro¬ 
priate legislation. To this end Congress has denied the 
quality of legal tender to foreign coins, and has provided 
by law against the imposition of counterfeit and base coin 
on the community. To the same end Congress may re¬ 
strain, by suitable enactments, the circulation as money of 
any notes not issued under its own authority. Without this 
power, indeed, its attempts to secure a sound and uniform 
currency for the country must be futile.” Under this view 
Congress might have suppressed State bank circulation, by 
a direct prohibition and the imposition of penalties, as well 
as by the exercise of the taxing power. 

In a recent case the Supreme Court said “ that only such 
notes as are in law negotiable so as to carry title in their 
circulation from hand to hand, are the subjects of taxation 
under the statute. It was no doubt the purpose of Congress 
in imposing this tax to provide against competition with the 
established national currency for circulation as money, but 
as it was not likely that obligations payable in anything 
else than money would pass beyond a limited neighbor¬ 
hood, no attention was given to such issues as affecting the 
volume of the currency or its circulating value.” It was, 
therefore, held that orders issued by a co-operative mercan¬ 
tile association, payable to bearer in merchandise, and used 
to some extent for circulation, were not within the act. 
(.Hollister v. Mercantile Association , hi U. S., p. 62.) 


WALTER D. DABNEY. 


31 


This review has shown how, notwithstanding doubts of 
its constitutionality occasionally suggested, State bank 
money constituted a large and increasing proportion of 
American currency from the first foundation of the Govern¬ 
ment ; how the attempt of a State to make direct issues of 
its own paper for circulation, in disregard of the constitu¬ 
tional prohibition, was frustrated by the United States Su¬ 
preme Court under the dominant influence of Marshall; 
and how, after his death, a departure from his views took 
place in the court, recognition was given to the issues of 
public State-owned banks, and the prohibition against the 
States emitting bills of credit thus practically evaded. It 
has also shown how the right of the National Government 
to create a paper currency, either directly or by means of 
banks of issue, was sustained against the encroachments of 
the States ; how, during a long series of years, paper money 
was circulated simultaneously under the authority of the 
States and of the National Government; and how the para¬ 
mount authority of the latter over the whole currency, which 
had been asserted many years before, even by statesmen of 
the strict States-rights’ school, was finally enforced by the 
expulsion of all State bank circulation, leaving a national 
currency only, consisting of coin, United States notes, and 
National bank notes. 

One power of the highest importance which had been 
asserted by Congress still wanted judicial sanction. This 
was the power of attaching the legal tender quality to 
United States notes. The decision of this question was 
avoided by the court as long as possible, and several cases 
which came before it, and were supposed to involve the 
question, were decided on other grounds. Finally, how¬ 
ever, it was squarely presented in the case of He-pburn v. 
Griszvold (8 Wallace), and, by a majority of the court, the 
legal tender clause of the act was held unconstitutional. 
Chief Justice Chase (who had, as Secretary of Treasury, 


32 


THE LEGAL EVOLUTION. 


advised the legal tender provision,) delivered the opinion ot 
the court against its validity ; thus, as Mr. Justice Field 
subsequently said, preferring -to preserve his integrity as a 
judicial officer rather than his consistency as a statesman. 

This decision was rendered in December, 1869. There 
were then eight justices of the Supreme Court, three ot 
whom dissented. A law had, however, recently taken 
effect authorizing the appointment of an additional justice ; 
and one of the judges, who concurred, resigning in Feb¬ 
ruary, 1870, rendered necessary an appointment to fill the 
vacancy thus occasioned. Accordingly Justice Strong was 
appointed in February, 1870, and Justice Bradley, in March 
following. The court was thus constituted of nine justices, of 
whom four were known to be adverse in opinion to the 
validity of the legal tender clause, and three were known 
to approve it. The views of the other two had not been 
judicially pronounced, though they were supposed to have 
been well understood by the appointing power, and to have 
furnished the controlling reason for their selection. The 
legal tender question came again before the court, as thus 
constituted, in December, 1870. (See “Legal Tender 
CasesT 12 Wallace.) The decision reversed that of Hep¬ 
burn v. Griswold -—the two recently appointed justices con¬ 
curring in opinion with the three who had dissented in the 
former case, in upholding the power of Congress to im¬ 
pose the legal tender quality. 

The leading political parties were at that time much more 
distinctly divided over this question than they are now, and, 
by the dominant party, the reversal of the decision against 
the legal tender notes was deemed a political necessity. 
Justice Clifford, dissenting in the case where this was done 
availed himself of the double meaning of a word to express 
in a delicate manner his opinion of the motives which con¬ 
trolled the majority of the court. He said the decision in 
Hefburn v. Griswold should undoubtedly be followed, 


WALTER D. DABNEY. 


33 


“unless it be held that the judgment in that case was given 
for the wrong party. 

The tender-making power, it will be observed, had up 
to this time been affirmed by five justices and denied by 
five. Several of the justices delivered their opinions at 
great length, and those who affirmed the constitutional 
authority of Congress seemed to uphold it chiefly as a war 
power growing out of the absolute necessity of the Govern¬ 
ment to preserve its existence. It was supposed by many, 
even after this decision, that the court would not sanction 
the exercise of the power by Congress, except upon occa¬ 
sion of the greatest and gravest emergency. 

By virtue of the act of Congress known as “ The Re¬ 
sumption Act,” specie payments were resumed on the ist 
of January, 1879—l e g a l tender notes might be 
paid off and redeemed in coin, if desired, on presentation 
at the treasury ; but an act had been passed in May, 1878, 
providing that such notes when redeemed, should be re¬ 
issued, paid out and put into circulation again. , This was in 
effect (as was decided) an imposition of the legal tender 
quality on new notes issued at a time when no urgent ne¬ 
cessity seemed to call for such action. The question whether 
Congress could do this was submitted to the Supreme Court, 
and decided in 1884. (.Legal Tender Cases , ito U. S., 
421.) The court said the question could not be distinguished 
in principle from that previously decided, and upheld the act 
of 1878, and the tender made under its authority. Justice 
Field alone dissented. 

No attempt has been made to present the arguments of 
counsel or the opinions of members of the court on either 
side of the question, in the several legal tender cases above 
referred to. Their length precludes the possibility of doing 
them justice in any analysis that could be condensed into a 
paper of the limited scope of this. Suffice it to say that the 
majority pursued a course of reasoning which led them to 
the following conclusions : 


34 


THE LEGAL EVOLUTION. 


1. That the power to attach the legal tender quality to the 
notes of the Government is “ necessary and proper” within 
the meaning of the Constitution to the execution of the ex¬ 
press power to borrow money, and incidental to the exclu¬ 
sive power over the currency. 

2. That the power is one of a class termed “ resulting 
powers,” which, though not itself expressly conferred on 
Congress, nor auxiliary to any single express power, yet 
results from the aggregate of all other powers of the Gov¬ 
ernment combined. 

3. That the United States Government, within the sphere 
over which it is sovereign, and for the purpose of exercising 
its sovereign powers, is invested with all incidental powers 
which, at the time the Constitution was adopted, were re¬ 
garded as inherent and implied in every sovereignty and 
essential to the exercise of its functions. The power to 
borrow money is one of the sovereign powers conferred on 
Congress by the Constitution, and, at the time that instru¬ 
ment was fra,med and adopted, the power to annex the legal 
tender quality to securities given by the Government for 
money borrowed by it, was regarded as a mere incident to 
the borrowing power itself, and had frequently been exer¬ 
cised by the States of Europe and this country, and conse¬ 
quently, could be exercised by Congress. 

Whatever may be thought of the policy, the power of 
the United States Government to make its own obligations, 
emitted as currency, a legal tender, seems to be too well 
settled by these decisions to admit of further controversy. 
The only legal tender paper money now in existence, how¬ 
ever, are the so-called greenbacks, representing the war 
issues, and the treasury notes issued under the Sherman 
act of 1890 for the purchase of silver bullion. Neither the 
silver certificates, which form so ltirge a proportion of the 
currency, nor the gold certificates are a legal tender ; but 
as both classes of certificates are obligations of the Govern- 


WALTER D. DABNEY. 


35 


ment for the re-payment of coin deposited in the treasury, 
they might undoubtedly be made such. And since the Gov¬ 
ernment is ultimately bound for the redemption of the Na¬ 
tional bank notes, it might probably make them also a legal 
tender. 

An interesting question arose recently as to the character 
of the “ clearing-house certificates ,” which were largely 
used as a temporary currency during the money famine 
which prevailed in the summer and autumn of last year. 
In the cities, the banks, both State and national, are usually 
members of an association known as the “ Clearing House,” 
through which their demands against each other are settled 
and balances ascertained. Upon the deposit by any bank 
with the officers of the Clearing House of securities for the 
balance found against it, the Clearing-House certificate of 
such deposit is recognized as an acceptable, negotiable in¬ 
strument by all other members of the association, and will 
be received as a deposit by any of them. During the panic 
the banks declined to pay checks drawn upon them in 
money, but those who were members of the various Clear¬ 
ing-House associations came to an understanding, which 
their depositors acquiesced in, that checks drawn on any of 
them might be paid in “Clearing-House Certificates” pay¬ 
able to bearer. This would give the bearer of the certifi¬ 
cate a claim for the amount specified in it, not only against 
the bank on which the check had been drawn, but against 
any member of the Clearing-House association. These cer¬ 
tificates were paid out, and, to a considerable extent, circu¬ 
lated as currency, especially in the smaller cities, in nearly 
all parts of the country. They were undoubtedly of great 
service in relieving the financial stringency. 

The question was presented by the Secretary of the 
Treasury to the Attorney-General whether these instruments 
were “notes used for circulation” within the meaning of 
the act of Congress imposing a tax of io per cent, on the 


36 


THE LEGAL EVOLUTION. 


amount of all such notes except those of National banks. 
The Attorney-General decided they were not. They were 
npt instruments, he said, upon which either the banks which 
deposited the securities for their payment, or the Clearing- 
House association, could be sued in an action at common 
law $nd a money judgment recovered, by proving and in¬ 
troducing the paper alone, without further evidence. The 
form of the particular certificate upon which this opinion 
was rendered was as follows on its face : 


ALBANY CLEARING HOUSE CERTIFICATE. Cl 

ALBANY, GEORGIA. VM 


No. [Copy.] Albany, Ga., August 29th, 1893. 

THIS CERTIFIES, that the FIRST NATIONAL, BANK, of Albany, 
Ga., has deposited with the undersigned officers of the Albany Clearing House, se¬ 
curities of the value of Two Dollars for the payment of the sum of 

-ONE DOLLAR- 

to said bank or bearer in lawful money of the United States, at Six Months from 
date, or earlier, at option of said bank. But no Certificate is to be issued bearing 
date later than January 1st, 1894. This Certificate will be received on deposit by 
any bank or banker belonging to the Clearing House Association of Albany at par 
at any time before its maturity. 

____ Sec'y. _____ Pres't. 


and on the reverse side it was thus : 



Applied to this instrument the opinion may be technically 
correct, since the certificate bore upon its face no express 



























WALTER D. DABNEY. 


37 


piomise to pay. But what shall be said of the following? 

$10.00. CLEARING CERTIFICATE No. 

OF THE 

ASSOCIATED BANKS OF DANVILLE, VA. 

Danville, Virginia , August 14th, 1893. 

Any of the Banks , whose names are printed below , will pay to bearer , on demand, 
TEBf DOI.I. 4 RS, ninety days after the above date, with interest at the rate of 6 
per cent, per annum. 

1 HIS CERTIFICA TE is negotiable and payable at any of these Banks. 

Interest will cease 90 days from the above-named date. The payment of this certifi¬ 
cate is secured by the combined capital of these Banks ; also by collateral worth one-third 
more than all the certificates issued. 

The following 6 Banks are formally bound for the payment of this paper: Planters' 1 
National Bank ; Commercial Bank ; Merchants' Bank ; Danville Saving Bank Loan and 
Improvement Co ; Border Grange Bank ; Citizens' Savings Bank. 

Sec’y and Treas of the Association. President of the Association. 


Whatever the law may be, the fact as expressed by a gen¬ 
tleman of Danville at the time, is that “ it was first-class 
State bank currency.” That such instruments are not 
within the act is by no means clear. 

But, notwithstanding clearing-house certificates and mer¬ 
chandise orders may, under peculiar and abnormal circum¬ 
stances, be used to some extent as a circulating medium, 
they are not money in the popular understanding of that 
word. The paper money of this country now is all based 
on the credit of the United States—all, except National 
bank notes, on the public credit exclusively and directly. 
And by the word credit in this connection is not meant a 
general confidence in the resources and greatness of the 
country, as in themselves alone imparting value to its paper 
issues. But it means a confidence that this paper money 
may, at any time, at the will of the holder, be exchanged 
for coin to its full lace amount. 

Since the resumption of specie payments the United 
States has continuously offered, and still offers, to redeem 
its notes in coin on demand. The liability to this demand 






38 


THE LEGAL EVOLUTION. 


is a source of constant danger. A supply of coin adequate 
to meet it must be always kept in the treasury ; and since 
the policy of the Government is to pay its obligations in 
gold, if desired, an adequate supply of gold to meet the 
probable demand must be kept constantly on hand. This 
is no easy thing to do ; the Government has recently had to 
borrow $50,000,000 to replenish its waning fund of gold. 
That, two, is liable to melt away, leaving the bonded debt 
of the country increased to that extent, and the volume of 
notes, of which payment may at any time be demanded in 
gold, undiminished. Surely this cannot be continued. If 
the Government must borrow, should it not, with the pro¬ 
ceeds of the loan, finally redeem its outstanding notes and 
cancel them? Should not the monetary system be abolished 
which imposes on the Government the duty of redeeming 
in coin on demand the paper money of the country? The 
result of this system, as is now being demonstrated, is to 
force the Government constantly to increase its bonded in¬ 
debtedness to maintain the fund of coin for the payment of 
its notes; which, since they are immediately reissued, 
remain undiminished in account, calling for a constant 
repetition of the process. Should not the function of pro¬ 
viding an adequate paper currency for the country, and of 
redeeming it in coin on demand, be confided exclusively to 
private enterprise—of course, under the strict supervision of 
the Government, and under such requirements of law as to 
make the redemption of paper issues in coin perfectly 
secure ? 

Then arises the question—which, indeed, apart from any 
consideration of retiring the greenbacks, is already before 
the country—shall State bank mon£y again come into exis¬ 
tence? A discussion of the economic bearings of this 
question would be out of place here. In respect to its legal 
or constitutional aspects, positions have recently been taken 
on both sides which seem to me equally untenable. One is 


WALTER D. DABNEY. 


39 


that State bank issues were from the beginning of the 
Government unconstitutional ; the other is that the exercise 
of the power of Congress to suppress these issues was an 
unconstitutional limitation of the right of the States. If 
the persons who make either of these assertions think their 
views would actually be sustained in the courts, should 
cases involving them be judicially presented, they cannot 
have well considered the decisions which I have attempted 
to present. The result of them is that the whole question 
is one for the determination of Congress, and should be 
decided upon considerations of policy and not of barren 
constitutional theories. 

That something should be done, and done speedily, to 
effect a radical change in the present system of bank cur¬ 
rency, either by opening the held to State bank money, or 
by establishing a new foundation for National bank issues, 
is beyond question. But cannot a system of National bank 
currency be devised which will meet the needs of the people 
of every State and all parts of the Union, as effectively as 
State bank issues could do so? And should not a solution 
of the trouble be attempted along this line? Upon eco¬ 
nomic, if not upon constitutional grounds, should not such 
control of the currency, at least as to insure its safety and 
uniformity, be left with the National Government? 

























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